Investment grade property has three characteristics, namely; more than 50% of its total value comprises of land value; its location and architectural style is in very scarce supply; and its historic long-term (20 or more years) growth rate has been over 5% p.a. plus inflation.

Expected population growth – not all cities are equal

Looking at the ABS’s population projections demonstrates why the middle ring (which I regard as between 2 kms and 15 kms from the city centre) within the major capital cities, will benefit from the strongest demand.

The projected growth rates between the capital cities and regional areas are stark.

Melbourne’s population is projected to surpass Sydney’s by 2060 (Sydney has the lowest growth rate out of the three eastern capital cities).

Melbourne and Sydney need to accommodate an extra 2 million people within the next 20 years. What impact do you think this will have on demand for property in middle-ring, blue-chip suburbs?

City

Actual Population 2012 (million)

Projected Population 2037 (million)

Sydney

4.67

6.70

Melbourne

4.25

6.50

Brisbane

2.19

3.50

Source: ABS

I think the projected population growth between Sydney and Melbourne is very interesting (i.e. Melbourne overtaking Sydney) – especially when you consider it in context of the current median price differential (being $1.12m versus $795k, respectively).

You would be excused for concluding that Melbourne has better long term growth prospects based on this data – although I’m probably biased.

Under or over-supply?

If you Google the words “housing undersupply” or “housing oversupply” you will find many articles, opinion pieces, projections, reports and commentary.

Each camp will try and convince you that they are right i.e. Australia is either facing an under or over supply.

Honestly, I have been reading the same rhetoric for that past 15 years (since I started ProSolution).

Most of these stories are touted by people with a vested interest.

My layperson’s opinion is that the housing market is materially balanced.

Of course, there are locations that are in either under or over supply.

That said, I don’t see too many people roaming the streets that can afford to rent a property but cannot find one.

And I don’t see too many vacant properties either.

My advice is to ignore this supply rhetoric as I think it’s mostly nonsense – especially as it doesn’t relate to investment-grade locations.

Maximum density? Not even close!

The Melbourne Economic Forum (here’s a summary of the presentation) highlighted in a recent presentation that housing density in the middle ring (which it defined as between 5 and 20 kms from the city centre) has not changed in almost 20 years.

This is in stark contrast to the inner-city (i.e. zero to 5 kms) where density has dramatically increased.

It has even improved in suburbs located 20 and 30 kms from the city centre (refer to the chart on page 12).

This is good news for investors because there will be increasing pressure on the middle-ring suburbs to eventually improve density.

As density increases, land becomes more scarce and as such land values appreciate. Blue-chip, middle-ring suburbs are well positioned to benefit from this the most.

Interstate migration and Brisbane

The Brisbane property market has really struggled over the past 10 years with a median price growth rate of only 4.1% p.a. compared to 7% p.a. for Melbourne and 7.5% p.a. for Sydney.

One major thing that has changed over this period of time is interstate migration.

As you can see from the chart below, there has been a dramatic fall in net migration to Queensland (grey line).

In fact, more people are moving to Victoria than Queensland which has never been the case.

This has a significant impact on property demand in Brisbane as many Sydneysiders and Melbournians were selling their comparably expensive homes and using that money to buy property in Brisbane.

That trend has significantly reduced and I can’t see property growth in Brisbane rebounding until interstate migration returns to normalised levels.

When will that happen?

No one knows.

It is for this reason that I feel Sydney and Melbourne are the only states worth investing in at this stage.

Stuart was a Chartered Accountant before establishing mortgage broking firm ProSolution Private Clients. He has authored two books and shares his experience with readers of Property Update. Visit www.prosolution.com.au

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